Gold rises, euro debt worries restrict gains

Gold rose on Friday but was still set for its largest one-week fall in a month, as growing uncertainty among investors over the ability of European leaders to deliver a comprehensive solution to the debt crisis kept the price near two-week lows.

Disagreement between Germany and France, the biggest contributors to the eurozone bailout mechanism, over how to structure the fund to effectively stem the spread of the crisis has prompted investors to attach a diminishing chance of a resolution any time soon.

Increasingly dire warnings from ratings agencies over the impact on the creditworthiness of not just vulnerable eurozone members such as Spain, Italy and Portugal, but also others such France, have added to the desire among investors to hold non-euro assets, denting the euro and causing European stocks to underperform their US equivalents.

Gold has increasingly performed like a risk-linked commodity and seen its correlation to European stocks reach its strongest in six months and that with copper rise to an 11-month peak. Yet it has seen strong demand from Asian consumers, which has pushed premiums to their highest since the start of the year.

Spot gold was last quoted up 0.3 percent on the day at $1,622.70 by 0950 GMT, but set for a 3.5 percent fall this week.

"At the end of the day, gold has got the physical business that comes in on the dips, as well as investors so that should hold it there, but even if we do come back to $1,550 or $1,500 again, if we get some more funding crises, you have to think there will be even stronger support down at those numbers, so I'm not too worried," said Credit Agricole analyst Robin Bhar.

"Is gold going to get back up to the highs? That's looking less certain now. It's not on the agenda, although you can never say never."

The euro has fallen by nearly 1 percent this week, while European equities have lost 2.4 percent, compared with a loss so far of just 0.8 percent in the Standard & Poor's 500.

Highlighting the investor pull out of gold this week, the price of bullion in most major currencies has fallen this week between 2.5 and 4.0 percent, while traded volumes in the most-active US gold futures contract GCv1 have run as much as 55 percent below their 30-day rolling average so far this month.

Investor interest in gold-backed exchange-traded products has materialised in a second consecutive weekly inflow of metal, with most inflows coming into European-based funds, which have added more than 135,000 ounces to their holdings this week.

This month, global gold ETF holdings are set for their largest net increase in three months, having risen by more than 170,000 ounces to 67.229m ounces.

European leaders gather in Brussels this weekend to try to put together a comprehensive package of measures to keep heavily indebted countries such as Greece solvent and prevent the debt problem spreading to neighbouring nations with fragile finances.

Deep divisions between France and Germany mean they will make scant progress on strengthening the eurozone bailout fund at a summit on Sunday in a sign that Europe's leaders are still some way from getting a grip on the bloc's debt crisis.

This uncertainty has put most asset classes under pressure this week and has clouded the outlook for the gold market, which relies usually on a degree of investor desire for relatively less risky assets in a turbulent market environment.

Gold's safe-haven properties have taken a backseat to those of the dollar as investors have shunned euro-denominated assets, which in turn has posed a stiff headwind to the bullion price, as this tends to benefit from a weaker US currency.

"The question in everyone's mind is of course: 'how long will this phase last?' No one can know for sure, but we can identify at least two potential catalysts to watch that could help gold to reclaim its safe-haven status," wrote UBS analyst Edel Tully in a note, adding the catalysts were renewed dollar weakness and a breakdown in the correlation of gold with risk.

Silver, which can move in lockstep with gold but more frequently tracks base metals, has fallen by more than 4.0 percent this week. It was last up 0.7 percent on the day at $30.71 an ounce.

Palladium was last up by more than 2 percent on the day at $596.22. The price has dropped by 4.1 percent to two-week lows as concern has increased over the outlook for demand, particularly following a soft read of Chinese economic growth, which is key for car sales in the world's largest auto market.

Palladium relies heavily on China as a source of demand for the metal in catalytic converters fitted in gasoline-powered vehicles.

Platinum was last flat at $1,491.0 an ounce.